Two or more people form a general partnership when they team up to run a business. Starting a general partnership is as simple as that. Unfortunately, when two or more people own a general partnership, they open themselves up to personal liability for the debts and financial obligations of the business. To avoid personal liability, partners may elect to act as limited partners by forming a limited liability partnership, or LLP.

Forming a Limited Liability Partnership

General partners can create a limited liability partnership by registering with a state agency and selecting a name that reflects the status of the partnership as an LLP. As a result of forming an LLP, all partners can fully participate in the management of the business without fear of holding personal liability for the debts of the business. To better understand the roles of partners in an LLP, we can examine the roles of partners in a limited partnership.

Roles of Limited Partners

While the limited partner in a limited partnership acts as a silent partner, limited partners in an LLP do not have restrictions on the roles they play in the business. In a limited partnership, the limited partners contribute capital to the business but cannot participate in the day-to-day management of the business. Conversely, all the limited partners in an LLP can participate in the management and control of the business and share the profits earned by the business. In an LLP, all limited partners can present themselves as partners in the business, and they can use their names in the business name without being subject to personal liability for the debts of the business.

Comparison with Limited Partnership

In a limited partnership, at least one limited partner and at least one general partner make up the ownership of the business. By choosing to be a general partner in a limited partnership, a partner subjects himself to all the liabilities that may stem from owning the business. That means that the general partner can be sued for any amount of money the business owes, and he may end up using his own personal assets to pay that debt. On the other hand, the limited partner does not incur this type of liability unless he oversteps his boundaries as a limited partner. If the limited partner in a limited partnership uses his name as part of the business name, participates in the management of the business or presents himself as a general partner, he will subject himself to personal liability for the debts of the business.

Tax Benefits of Limited Liability Partnership

The LLP offers tax benefits to its owners. Unlike with a corporation, the owners of an LLP are only taxed once. When people hold ownership in a corporation, they receive double taxation. The corporation, itself, is taxed on its profits. When the owners of the corporation receive income from the corporation, the government takes taxes out of that income. The owners of an LLP do not have to worry about being taxed twice. The government only taxes the owners of an LLP on the profits they receive from the LLP.

References (1)

About the Author

August Jackson is a contributor to various websites. She has taken courses in copywriting and has worked in corporate America as a proofreader. Jackson holds a Bachelor of Arts in English and a Juris Doctor with an emphasis in bankruptcy law.